Gold & Silver Trading Alert originally sent to subscribers on April 24, 2015, 8:39 AM
Briefly: In our opinion, a speculative short position (full) in gold, silver and mining stocks is justified from the risk/reward point of view.
We have been recently asked to describe our outlook for the following months and in today’s alert we do exactly that. The important news is that our outlook has just changed - today’s alert features the details.
Before moving on to the long-term gold chart (and this will be the only chart for today), let us briefly say that yesterday’s move higher in gold, silver and mining stocks took place on relatively low volume (visibly lower than what we saw during Wednesday’s decline) and it seems to be nothing more than a post-decline bounce / corrective upswing. The trend remains down and the short positions remain justified from the risk/reward point of view.
Having said that, let’s move to gold’s medium-term outlook (charts courtesy of http://stockcharts.com).
Let’s start with the Stochastic indicator and the way in which it moved this year. Several months ago we wrote that when this indicator flashed a sell signal in the overbought territory it very often marked major tops – it turned out that we were at a major top at that time. Shortly thereafter both gold, and the indicator declined. The decline took place over a few weeks taking both of them much lower. The following rebound took gold and the indicator a little higher and – based on yesterday’s closing prices – we saw a sell signal from the Stochastic indicator once again.
At this point you may ask why this is significant at all. The reply is because we saw that kind of performance 2 times previously and what happened after these situations was very, very significant. The similar cases were: mid-2008 and late-2012 / early-2013. After both cases, we saw huge declines. What’s more interesting, if we compare the post-signal declines it turns out that they were quite similar. What’s even more interesting is that if we plot the same size of the decline on the current price on the above chart (we marked these copied declines with black and grey dashed lines), you’ll see that they both point to a decline to about $900 level.
Why is this level significant? Because that’s where we have the 61.8% Fibonacci retracement ($890) based on the entire bull market and also the lower border of the declining trend channel, which serves as support. Two local bottoms from 2008 and 2009 are also a little below $900.
Consequently, we have quite a few factors pointing to a final bottom close to the $890 level.
However, there are several factors that point to a different target area – the one that we have previously wrote about as the one that’s most likely to stop the final bottom – the one around $1,000 and $1,040. That’s where we have the following:
- Horizontal support based on the 2008 high and 2009 bottom
- Psychologically important $1000 level (gold moving back into 3 digits is an important development as it might make many investors and traders view it as relatively inexpensive)
- Target based on the late-2014 – today head-and-shoulders pattern (the size of the move following the breakdown below the neck level is likely to be greater or equal to the size of the head of the pattern).
Which of the target areas is more likely to be the final bottom? Here’s our best estimate in terms of probabilities:
- 10% probability that the final bottom in precious metals is already behind us
- 10% probability that we’ll see the final bottom with gold at $1,085 - $1,100
- 35% probability that we’ll see the final bottom with gold at $1000 - $1,040
- 35% probability that we’ll see the final bottom with gold at $850 - $900
- 10% probability that we’ll see the final bottom with gold below $850
Before yesterday’s close our estimate for the probability of bottom in the $1000 - $1040 area was higher and the estimate for the $850 - $900 area was lower. However, based on the sell signal from the Stochastic indicator and the similarity to the previous major declines, we adjusted them and currently think that there are similar odds for the major bottom being in either of the areas.
When is the final bottom likely to take place? Our current best guess is the fall or early winter this year. It could happen a little sooner (summer of this year) or a bit later (the first months of 2016), but most likely, we’ll see the major bottom in the precious metals market this year. Fortunately, we have some time to get ready for this epic buying opportunity.
We’ll be looking for confirmations when the market moves to these levels and we’ll take action (or not) depending on what kind of confirmations and how many of them we’ll see.
What kind of confirmations we’ll be looking for and how gold will rebound and how high it will go are other question that your Editor was asked during the recent conversations (the conversations that subscribers that are accredited investors can choose as the 6th-GSTA-anniversary gift) and that’s what we’ll cover in the alerts in the following days.
Before summarizing, we’d like to discuss an additional thing:
Are we bearish on gold?
In a way, yes, but we don’t view ourselves as “gold bears”. We’re “gold bulls” that simply think that there will be a much better opportunity to enter the market than the current situation. Consequently, we are not in the precious metals market at this time with the long-term investment capital, but we are waiting for the opportunity to enter it once again, as we think that fundamentals and the long-term trend favor MUCH higher precious metals prices.
Summing up, we think that gold will move much higher (in the following years), but only after it declines once again (in the following months). It seems that another bigger downswing has already started and that it will continue for a few tens of dollars for gold before we see any significant rebound. The price-volume analysis and other factors continue to favor the bearish outlook for the short and medium term.
We will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): Short (full position) position in gold, silver and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and initial (!) target prices:
- Gold: initial target price: $1,115; stop-loss: $1,253, initial target price for the DGLD ETN: $87.00; stop loss for the DGLD ETN $63.78
- Silver: initial target price: $15.10; stop-loss: $17.63, initial target price for the DSLV ETN: $67.81; stop loss for DSLV ETN $44.97
- Mining stocks (price levels for the GDX ETN): initial target price: $16.63; stop-loss: $21.83, initial target price for the DUST ETN: $23.59; stop loss for the DUST ETN $12.23
In case one wants to bet on lower junior mining stocks' prices, here are the stop-loss details and initial target prices:
- GDXJ: initial target price: $21.17; stop-loss: $27.31
- JDST: initial target price: $14.35; stop-loss: $6.18
Long-term capital (our opinion): No positions
Insurance capital (our opinion): Full position
Please note that a full position doesn’t mean using all of the capital for a given trade. You will find details on our thoughts on gold portfolio structuring in the Key Insights section on our website.
As a reminder – “initial target price” means exactly that – an “initial” one, it’s not a price level at which we suggest closing positions. If this becomes the case (like it did in the previous trade) we will refer to these levels as levels of exit orders (exactly as we’ve done previously). Stop-loss levels, however, are naturally not “initial”, but something that, in our opinion, might be entered as an order.
Since it is impossible to synchronize target prices and stop-loss levels for all the ETFs and ETNs with the main markets that we provide these levels for (gold, silver and mining stocks – the GDX ETF), the stop-loss levels and target prices for other ETNs and ETF (among other: UGLD, DGLD, USLV, DSLV, NUGT, DUST, JNUG, JDST) are provided as supplementary, and not as “final”. This means that if a stop-loss or a target level is reached for any of the “additional instruments” (DGLD for instance), but not for the “main instrument” (gold in this case), we will view positions in both gold and DGLD as still open and the stop-loss for DGLD would have to be moved lower. On the other hand, if gold moves to a stop-loss level but DGLD doesn’t, then we will view both positions (in gold and DGLD) as closed. In other words, since it’s not possible to be 100% certain that each related instrument moves to a given level when the underlying instrument does, we can’t provide levels that would be binding. The levels that we do provide are our best estimate of the levels that will correspond to the levels in the underlying assets, but it will be the underlying assets that one will need to focus on regarding the sings pointing to closing a given position or keeping it open. We might adjust the levels in the “additional instruments” without adjusting the levels in the “main instruments”, which will simply mean that we have improved our estimation of these levels, not that we changed our outlook on the markets. We are already working on a tool that would update these levels on a daily basis for the most popular ETFs, ETNs and individual mining stocks.
Our preferred ways to invest in and to trade gold along with the reasoning can be found in the how to buy gold section. Additionally, our preferred ETFs and ETNs can be found in our Gold & Silver ETF Ranking.
As always, we'll keep you - our subscribers - updated should our views on the market change. We will continue to send out Gold & Silver Trading Alerts on each trading day and we will send additional Alerts whenever appropriate.
The trading position presented above is the netted version of positions based on subjective signals (opinion) from your Editor, and the Tools and Indicators.
As a reminder, Gold & Silver Trading Alerts are posted before or on each trading day (we usually post them before the opening bell, but we don't promise doing that each day). If there's anything urgent, we will send you an additional small alert before posting the main one.
Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Gold & Silver Trading Alerts
Forex Trading Alerts
Oil Investment Updates
Oil Trading Alerts
